Duka v. U.S. Sec. & Exch. Comm'n, 15 Civ. 357RMBSN.

• Decision Date: 15 April 2015
• Docket Number: No. 15 Civ. 357RMBSN.,15 Civ. 357RMBSN.
• Citation: 103 F.Supp.3d 382
• Parties: Barbara DUKA, Plaintiff, v. U.S. SECURITIES and EXCHANGE COMMISSION, Defendant.
• Court: U.S. District Court — Southern District of New York

103 F.Supp.3d 382

Barbara DUKA, Plaintiff,

v.U.S. SECURITIES and EXCHANGE COMMISSION, Defendant.

No. 15 Civ. 357RMBSN.

United States District Court, S.D. New York.

Signed April 15, 2015.

Daniel Zachary Goldman, Guy Petrillo, Nelson Andrew Boxer, Petrillo Klein & Boxer LLP, New York, NY, for Plaintiff.

Adam Grogg, Justin Michael Sandberg, U.S. Department of Justice, Civil Division, Federal Programs Branch, Jean Lin, U.S. Dep't of Justice, Civil Div., Washington, DC, Jeannette Anne Vargas, New York, NY, for Defendant.

DECISION & ORDER

RICHARD M. BERMAN, District Judge.

“When a Federal court is properly appealed to in a case over which it has by law jurisdiction, it is its duty to take such jurisdiction.... The right of a party plaintiff to choose a Federal court where there is a choice cannot be properly denied.” New Orleans Pub. Serv., Inc. v. New Orleans,491 U.S. 350, 358, 109 S.Ct. 2506, 105 L.Ed.2d 298 (1989)(quoting Willcox v. Consol. Gas Co.,212 U.S. 19, 40, 29 S.Ct. 192, 53 L.Ed. 382 (1909))

I. Introduction

This is one of a series of cases which seeks to enjoin on constitutional grounds the United States Securities and Exchange Commission from adjudicating within that agency alleged civil violations of the securities laws by persons notassociated with regulated entities. The principal contention of Plaintiff Barbara Duka (and others) is that the administrative law judges who adjudicate such cases pursuant to provisions of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, Pub.L. No. 111–203(“Dodd–Frank”), are insulated unlawfully from oversight by the President who, under Article II of the Constitution, is vested with the “executive power,” including the ability to hold executive officers accountable by removing them from office. The SEC responds that the federal district courts are without subject matter jurisdiction where, as here, the Commission has elected to proceed within the agency.¹

For the reasons set forth below, the Court finds, first, that it has subject matter jurisdiction to examine Duka's plea that the SEC administrative proceedings against her be halted but, second, that Duka is not entitled to preliminarily enjoin the SEC proceedings because she is “unlikely to succeed on the merits” of her constitutional claim.²³

II. Background

On January 16, 2015, Barbara Duka (“Plaintiff” or “Duka”), formerly a co-manager of the commercial mortgage backed securities group of Standard & Poor's Rating Services (“S & P”), filed a complaint in this Court against the United States Securities and Exchange Commission (“SEC” or “Government” or “Commission”) seeking declaratory and injunctive relief. (Compl., dated Jan. 16, 2015 (“Compl.”), ¶ 1.) The Complaint seeks to prevent Duka “from being compelled to submit to an [allegedly] unconstitutional [SEC administrative] proceeding” which, in fact, was initiated against her on January 21, 2015. (Compl. ¶¶ 2, 5.) Plaintiff contends that the SEC administrative law judges (“ALJs” or “SEC ALJs”) who are responsible for adjudicating SEC administrative proceedings (“Administrative Proceeding(s)”) “enjoy at least two layers of tenure protection,” which insulate them from Presidential oversight. (Id.¶ 3.) According to Plaintiff, SEC Administrative Proceedings are, thus, unconstitutional on their face because they violate Article II of the United States Constitution.⁴(Id.)

Administrative Proceedings

The Administrative Procedure Act, 5 U.S.C. § 500 et seq.(“APA”), authorizes executive agencies of the government such as the SEC to conduct Administrative Proceedings before an ALJ. ALJs have the authority to “administer oaths and affirmations”; “issue subpoenas authorized by law”; “rule on offers of proof and receive relevant evidence”; “regulate the course of the hearing”; and “decide the case.” 5 U.S.C. §§ 556, 557. The ALJ serves as the finder of fact and of law (i.e.,there are no juries). (Compl. ¶ 21.) Executive agencies, including the SEC, may appoint “as many administrative law judges as are necessary.” Id.§ 3105. SEC ALJs are assigned their cases by the Chief Administrative Law Judge of the SEC pursuant to authority delegated to the Chief ALJ by the Commission. 17 C.F.R. § 200.30–10.

Prior to the enactment of Dodd–Frank, the SEC was authorized to impose civil penalties in Administrative Proceedings only against “regulated person [s]” or companies. See Gupta,796 F.Supp.2d at 507. Before Dodd–Frank, in order to obtain civil penalties from non-regulated entities, the SEC was required to file a civil enforcement action in federal district court. See id.Dodd–Frank authorized the SEC to elect to impose civil penalties in Administrative Proceedings against “a person if the Commission finds, on the record ... that such person ... is violating or has violated any provision of [the Exchange Act], or any rule or regulation issued under [the Exchange Act].” 15 U.S.C. § 77h–1(g).

The defendant in an SEC Administrative Proceeding (such as Duka) may appeal an ALJ's decision to the Commission, which is comprised of five Commissioners (one of whom is Chairman) appointed by the President.⁵17 C.F.R. § 201.410. Or, the Commission may review an ALJ's decision “on its own initiative.” Id.§ 201.411(c). The Commission “may affirm, reverse, modify, set aside or remand for further proceedings.” Id.§ 201.411(a). If a defendant does not appeal and if the Commission does not initiate review on its own, the Commission will issue an order making the ALJ's decision “final.” Id.§ 201.360(d)(2).

A person who is aggrieved by a final order of the Commission may seek judicial review in the United States Court of Appeals for the circuit in which he or she resides or has his or her principal place of business, orbefore the United States Court of Appeals for the District of Columbia Circuit. 15 U.S.C. § 78y(a)(1).

All ALJs, including SEC ALJs, are removable from employment by their respective agency heads (in this case, the Commission) but only for “good cause.” Good cause must be “established and determined” by the Merit Systems Protection Board (“MSPB”), an independent federal agency which handles federal employee appeals of adverse employment actions. 5 U.S.C. § 7521; 5 C.F.R. § 930.211(a). The SEC Commissioners, in turn, “cannot themselves be removed by the President except [for] inefficiency, neglect of duty, or malfeasance in office.” Free Enterprise Fund v. Pub. Co. Accounting Oversight Bd.,561 U.S. 477, 487, 130 S.Ct. 3138, 177 L.Ed.2d 706 (2010)(citation omitted).

The SEC Proceeding against Plaintiff

The SEC alleges in its Administrative Proceeding against Duka that during the period 2009 through 2011, Duka was managing director at Standard & Poor's Ratings Services “with responsibility for new issue ratings of Commercial Mortgage Backed Securities.” (Order Instituting Administrative and Cease–and–Desist Proceedings, dated Jan. 21, 2015, attached as Ex. 3 to Decl. of Daniel Goldman, dated Jan. 26, 2015 (“Goldman Decl.”), ¶ 1.) The SEC contends that “S & P's CMBS Group, acting through and led by Duka, published eight CMBS Presale reports between February and July 2011 in which S & P failed to disclose its relaxed methodology for calculating DSCRs [Debt Service Coverage Ratios].” (Id.¶ 6.) The result, according to the SEC, is that “[m]arket participants were ... misled into believing that the ratings at issue were more conservative than they actually were.” (Id.) According to the SEC, “Duka willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b–5 thereunder, which prohibits fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of securities.” (Id.¶ 49.) The SEC also contends that Duka “should be ordered to cease and desist from committing or causing or aiding and abetting violations of and any future violations of Section 17(a) of the Securities Act,” and should be ordered to pay a civil penalty and “pay disgorgement.” (Id.at 11.)

On January 22, 2015, the SEC designated ALJ Cameron Elliot to preside over Plaintiff's Administrative Proceeding.⁶

Plaintiff was ordered to appear at a (scheduling) hearing on February 23, 2015. (Order Scheduling Hearing and Designating Presiding Judge, dated Jan. 22, 2015, attached as Ex. 4 to Goldman Decl.) ALJ Elliot issued an order scheduling the adjudicatory hearing in Plaintiff's Administrative Proceeding to begin on September 16, 2015. (See,Order Following Prehearing Conference, dated Feb. 26, 2015, attached as exhibit to Letter from Nelson A. Boxer to Hon. Richard M. Berman, dated Feb. 27, 2015.)

Plaintiff's District Court Claim

Plaintiff contends here, as noted, that the Administrative Proceeding initiated against her is unconstitutional under Article II (The President “shall take care that the laws be faithfully executed....”). According to Plaintiff, Article II requires that “executive officers, who exercise significant executive power, be unprotected from removal by their superiors at will, when those superiors are themselves protected from removal by the President at will.”⁷(Compl. ¶ 51.)⁸

Plaintiff's January 26, 2015 motion seeks to “temporarily restrain and preliminarily enjoin the SEC from continuing and prosecuting the administrative proceeding it initiated against her.” (Mem. of Law in Supp. of Pl.'s Mot., dated Jan. 26, 2015 (“Pl. Mem.”), at 1.) It argues, among other things, that: (1) this Court has subject matter jurisdiction because “dismissing Ms. Duka's Complaint would foreclose meaningful judicial review of her constitutional claim”; “Ms. Duka's claim ... is wholly collateral to the Administrative Proceeding”; and Duka's claim is “outside the SEC's expertise”; (2) Plaintiff is likely to succeed on the merits of her claim because “SEC ALJ s, as inferior Officers, are protected from removal by at least two levels of ‘good cause’ tenure protection” and, thus, the President cannot oversee SEC ALJ s in accordance with his Article II responsibilities; (3) “Ms. Duka...